The Real Estate Espresso Podcast

On today’s show we’re taking a look at the impact of the emergence from the pandemic. We are facing a renewed sense of optimism in the economy with signs of dropping case counts for new infections. We have states like Texas and Mississippi fully opening their economies and dropping mask mandates completely. But the path from A to B is rarely a straight line. Some of the dropping case counts represent a false sense of security. A small but growing proportion of these cases are the so-called mutant variants that have higher rates of transmission. The UK variant is nearly 50% more transmissible than the original SARS Cov2 virus and represents a fast growing percentage of the new cases. It only took a few months in the UK for the new variant to become the dominant strain of the virus. So while the current case counts are dropping, the new variants represent a threat to the pandemic recovery. There is no question that the emergence from the pandemic will vary widely from one geographic region to the next. Cities that have a high exposure to travel and hospitality like Las Vegas will experience a protracted recovery, even if governments throw the gates wide open tomorrow. It is going to take time before the public at large regains the confidence to travel en masse for vacations. 2021 will continue to be a second year of social distanced, driving distance vacations. Friends of mine who have taken recent trips report less than 25 passengers on aircraft capable of carrying 150 passengers. The rate of vaccination is another variable. As of the first week of March, some states in the US report less than 15% vaccine penetration. Other states are currently at 25-30% vaccine penetration. These differences will also Israel has led the world in terms of vaccine rollout. So far 85% of those over age 60 have been vaccinated, and 40% of those aged between 16 and 60 have been vaccinated. Recent reports from earlier this week show that Covid-19 infection rates for those who have been vaccinated in Israel are one in 1,500. If these results are mirrored elsewhere in the world, the outlook for an end to the pandemic is promising. But it will take a long time before the rest of the world catches up to Israel. President Biden made a bold claim that enough doses will be available in the US to fully inoculate the population by May. So far as of March 3, the US has administer 23 doses of vaccine per 100 people. But in Canada, that number sits at 5 doses per 100 people. There are a few warning signs for investors in hospitality. Of course the hotel industry has been hammered in 2020 due to the pandemic. There was a lot of new supply under construction in 2020 which could not have foreseen the pandemic or its impact. Four markets stand out with more than 9% of the existing inventory of rooms under construction. Those four cities are Nashville, Austin, San Jose and New York. Ten markets have between 6-9% of their existing inventory under construction. Such a large increase in supply coming online in a short period of time leaves an uncertain future for hotels in those markets. Those 10 markets are Portland, Salt Lake, Denver, Savannah, Oklahoma City, Jacksonville, Columbus, Charlotte, South East Florida, and Detroit. Hotel occupancy was 45% for the year and currently about 20% of hotels are in default on their loans. But lenders appear to be working with hotel operators and the number of forced transactions remains small at the moment. Not surprisingly, hotels in sun belt destinations have fared better than most other areas. The lone exception is Hawaii where hotel occupancy is one of the lowest across the US. The five worst performing markets for travel and leisure were New York, Boston, Chicago, Seattle, and San Francisco. All of these markets show declines in rev per available room in excess of 65% compared with 2019.

On today’s show we’re talking about a tectonic shift that is happening in virtually every community in North America. There is a lot of development land available in the core of major cities. Now as you’re hearing this you’re probably thinking, no there isn’t, not in my city. But I want you to think about large land parcels that have the potential to be redeveloped. It is rare to find anything more than 5 acres in the core of a city. But these do exist. What I’m seeing are the handful of shopping malls that have become functionally obsolete in each community. These shopping malls are every 4-5 miles apart. Many of them are dying. At one time they had one or two anchor stores, maybe a Kmart or a Sears department store. These medium sized shopping malls were designed and built in the 1960’s and 1970’s. The large national brands have left these malls. The tenants are small independent businesses. You might find a real estate brokerage, or an insurance company, a dental clinic occupying space in the shopping mall. There might be a pharmacy or a walk-in medical clinic. But this type of use is no longer the shopping mall experience for which the space was designed. Once an anchor to a mall is gone, it’s unlikely that a new anchor will be induced to occupy that space. I’ve seen major development firms acquire shopping malls with a view to redeveloping those sites. They are land banking those sites in the short to medium term. It takes a while to put together a plan, get the community on board with the redevelopment of the site and complete the development. I don’t typically give our listeners homework. But today I’m going to give you homework. This homework is for anyone who is truly interested in forecasting what is going to happen in their local community. So if that describes you, you want to pay close attention. The assignment is very simple. You mission, should you choose to accept it, is to document all of the dead or dying shopping malls. You want to figure out how large those parcels are and estimate what type of multi-family product could be developed on those properties. Some might end up as a garden style apartment complex. Others might be a high rise project. In both cases, the limiting factor is almost always the parking density. You need to figure out will the project be limited by surface parking or structured parking. Parking nearly always consumes almost the same amount of land as the apartments. So once you’ve gone through that analysis, you will be able to predict the projects that will come to fruition over the next 5 to 10 years. You’ll be seeing around corners and predicting what will happen in terms of new supply entering the market, before the zoning applications hit the zoning office. The next thing to pay attention to is all of the dead or dying office buildings and make a determination which ones have the potential to be converted to residential, the hotels that have the potential to be converted to senior housing, and the ones that are functionally obsolete and can’t be repurposed. We are at an inflection point in real estate. The pandemic has poured jet fuel on some trends that might have taken 20 years to play out. Now they’re going to happen in half the time or less. When you start to look at a city through the lens of a developer, you can start to see around corners. Why? Because you’re the one who’s creating the bend in the road. If it’s not you, then it’s someone you know.

Dr. Lee in Michigan asks, My question concerns the highest and best use of soon-to-be vacant commercial space. It seems as if there are many assisted living facilities in my area and it's not really a business model I know very much about.   However, I do have quite a bit of experience in value engineering and developing real estate.  If I have 6,000 square feet of vacant commercial space (roughly 60 x 100) with all utilities available, would this be large enough to repurpose into an assisted living space in which I could build out and rent to an operator?  The current, soon-to-be-former use is a combination warehouse and office space. What else do I need to be thinking about with respect to the property's potential for this use versus any other use (besides zoning)? Lee this is a great question. You are correct that the property has the potential to be repurposed. Whether the building would be a good starting point for an assisted living project depends on several factors. The regulations that govern assisted living are unique to each state and province. In the realm of residential assisted living, some states limit the number of beds. In the case of Michigan where you are located, these homes are called adult foster care homes. there are several different classifications. There are rules for homes having up to 6 residents, homes up to 12, up to 20 and above 20. The state publishes a handy 24 page document that provides some basic information. But in order to fully understand the requirements you will need to consult an architect who has experience in building these types of facilities in the state of Michigan. But before you even go down that path, there are a few things I can tell you from being involved in the construction of these types of facilities. The first thing you should determine is the supply and demand situation in your community. This involves visiting the existing homes in the area and making an assessment of their occupancy. You may find that the market is saturated with offerings compared with the current demand. However, the market segments into many different types of facilities. It might be over-supplied in one area and undersupplied in another. The assisted living business is first and foremost a service business built on top of a real estate business. The financial performance it is dominated by the service side of the business. You will find that the cost of your construction is not the determining factor in the success of your project. The 6,000 SF footprint you outlined should be enough to build a viable product. The homes we design are a little larger at 8,500 SF. But you should be able to come up with an efficient design that would fit in a smaller envelope.  The service offering can vary widely in price to the end customer. Some facilities focus on insurance paid and subsidized services. Some focus on customer paid. The pricing model might be a fixed price all you can eat type of offering, or it might be a la carte pricing. Talk to people who are in the industry and can give you a sense for how the economic model is constructed in your community. If your facility is going to specialize in memory care, that might command a premium in the market compared with basic services. If you see a need for a particular segment that is under served, you could discover an opportunity. For example, maybe there is no senior housing that caters to those on a vegetarian diet or a vegan diet. Maybe there is no kosher house and the demand exists for say kosher or halal cooking. The key to building a successful venture in this regard involves finding the operator that you are going to trust to run the business successfully, to qualify for and maintain the state license.

Today’s show is another book of the month book review. Our book this month is a brand new book called “Think Again: The Power of Knowing What You Don’t Know” by Adam Grant. Adam is a deep thinker. His book is a deep exploration of the question. “What do we know?” Adam Grant is an organizational psychologist at Wharton. He’s one of TED’s most popular speakers and his books have sold millions of copies. His talks have been view more than 25 million times and his podcast called Work-Life is great. I listen to it regularly. He’s been recognized as one of the world’s 10 most influential management thinkers. He’s a graduate of Harvard and completed his PhD from the University of Michigan. Adam’s book Think Again examines numerous questions like: What does it mean to be mentally fit? Normally we think that intelligence is a prerequisite. Intelligence is traditionally viewed as the ability to think and learn. Yet in our current world, there may be another set of cognitive skills that might matter more: the ability to rethink and unlearn. He examines how opinions and beliefs are formed. He looks at the history of research on the topic and how faced with the exact same circumstances, some people get attached to their thoughts. Their very identity is wrapped up in their opinion. For others, they exhibit the ability to let go of opinions, to change their mind, and to remain attached to principles and values rather than beliefs and opinions. Being wrong is often burdened with social stigma, with weakness. This is particularly true for men. So rather than believing what we see, we see what we believe. In psychology there are at least two biases that drive this pattern. One is confirmation bias: seeing what we expect to see. The other is desirability bias: seeing what we want to see. These biases don’t just prevent us from applying our intelligence. They can actually contort our intelligence into a weapon against the truth. Thinking like a scientist involves more than just reacting with an open mind. It means being actively open-minded. It requires searching for reasons why we might be wrong—not for reasons why we must be right—and revising our views based on what we learn. “Arrogance is ignorance plus conviction,” “While humility is a permeable filter that absorbs life experience and converts it into knowledge and wisdom, arrogance is a rubber shield that life experience simply bounces off of.” What I love about Adam’s book “Think Again” is that he challenges both loosely held and even tightly held beliefs about the way we conduct ourselves. He doesn’t care that he might offend someone. He has the research to back up all of his assertions. His findings are at times counter intuitive. The conclusions often break the author’s previous beliefs. He had to unlearn some of his old ideas. It’s only then that we can grow past our own limiting beliefs.

Bob is the author of the book of the month this past month "The Go Giver". On today's show we are taking a look behind the curtain to understand the process of writing a book and being positioned as a thought leader. There are several powerful lessons in this at times intimate conversation with Bob.  To learn more or connect with Bob, his website is at burg.com

Bill Ham is a specialist in redevelopment of properties. On today's show we're talking about mass obsolescence of assets in the market that has not been factored into the housing metrics by demographers, city planners, or even investors.  Bill is based in Atlanta Georgia where he runs Broadwell Property Group. You can connect with him directly at broadwellpropertygroup.com

On today’s show we’re looking at the trajectory of interest rates for the coming months. This is widely covered in the mainstream news. If we only repeated what you could read in the Wall Street Journal, or on CNBC then this show would not be adding any value. So we’re going to dig a bit deeper into the analysis of the Fed Chairman’s remarks to the Senate Finance Committee earlier this week to make sense of what it means for real estate investors. There were two major items of business at the Senate Finance Committee meeting this time around. #1 was to get the economic update and statement from the federal reserve chairman Jerome Powell. Second was to confirm Janet Yellen as Treasury Secretary. Janet Yellen was chair of the Fed before the appointment of Jerome Powell. So she is interacting with her counterpart in the Fed from the perspective of someone who used to occupy that chair. When Janet Yellen was chair of the fed, she was beating the drum about the need to print money to keep the economy healthy. Now as Treasury Secretary, she’s beating that drum even louder even before being formally confirmed in the position. Even before the Senate Finance Committee meeting, we have been seeing a lot of market activity. The low interest rate environment is driving demand for refinancing of debt into lower cost debt. I can tell you from conversations I’m having with lenders that their origination desks are over-flowing with demand for refinances. This is true a traditional banks, commercial lenders, and even the loan insurers like Fannie Mae, Freddie Mac and HUD. The department of housing and urban development divides the nation into regions and services loan requests out of their regional offices. I’m hearing that the HUD office in Fort Worth Texas has such a backlog that they will not even assign an analyst to look at a file for three weeks after receipt of an application. The delay in the San Francisco office is now more than 6 weeks before they will even look at a new file. Achieving inflation that averages 2 percent over time helps ensure that longer-term inflation expectations remain well anchored at the FOMC's longer-run 2 percent objective. Hence, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time. So this means that they’re going to hold interest rates low even once inflation is shown to be above the 2% target for a period of time. They reiterated the intention to continue the current stimulus until late into 2021 and likely into 2022. Fed Chairman Jerome Powell said strong demand is driving Treasury bill yields close to zero. “It’s a lot of demand for short-term,” said Powell. “There’s a lot of liquidity, and people want to store it” in Treasury bills. Powell said Treasury instruments are the concern of the Treasury Department, and the Fed is more concerned about keeping its target fed funds rate in its targeted range of zero to 0.25%. So he recognized where the extra cash is ending up, and basically said that it’s Janet Yellen’s problem to issue the treasury notes. Paradoxically, the yield on the longer term treasury notes has been rising in recent weeks. It’s an indication that the sentiment of inflation remaining low is not being widely accepted by the market. The dollar is losing value against major currencies and the yield for US Treasuries is going up. The reason we focus on the 10 year treasury is that most permanent financing interest rates are based on a rate lock that is tied to the yield on the 10 year treasury. The benchmark Treasury note jumped above 1.50% on Thursday afternoon after investors showed weak demand for $62 billion of 7-year notes. The 10-year note yield climbed 15 basis points to 1.54%.

On today’s show we’re talking about how to buy a business. We are in the middle of negotiating the purchase of a business. The seller’s accountant proposed that rather than purchase the assets of the business we should consider buying the shares of the company instead. So on today’s show we’re going to do a deeper dive on the merits of a share purchase versus an asset purchase. When you buy a business in its entirety, you’re buying everything within the business, all of its assets and all of its liabilities. This has some risk to the buyer because liabilities come in two different forms. There are actual known liabilities, and then there are contingent liabilities that can be hiding beneath the surface. I’ll give you a simple example to explain the difference between the two. Let’s say that you borrow $100 from the bank. Then you owe the bank $100 and that gets listed on the company’s balance sheet as a liability. But let’s say that you signed a contract and that contract has a clause which says you’ll defend the other party in the contract if they get sued for whatever reason. In legal terms, this is called an indemnity, in which you agree to indemnify or hold harmless the other party against a risk. For example it’s common to have an indemnity for the employees of a business in case they get sued in the course of doing their job. The employer would agree to defend the employee against a law suit that was brought against an employee if that suit was connected with the work they were doing for the company. Now let’s say that a so far, there are no lawsuits against the company, or its employees. Let’s say that a year later, one of the employees gets slapped with a lawsuit connected with their work for the company. That potential for a lawsuit would be considered a contingent liability. But in truth, not only is it a contingent liability, it’s also an unknown liability. Another form of contingent liability is a future tax liability. The tax owing is a function of a number of complex factors. Let’s say that the company has been claiming depreciation and that has the effect of lowering the cost basis of some of the inventory or equipment in the business. Let’s say that you then decide to sell that equipment and because it might have been depreciated for tax purposes faster than it actually depreciated in the open market, you now are facing a capital gain on the sale of a piece of used equipment. It could be a piece of equipment or a building. It doesn’t matter. The principle is the same. So when you buy a company bu purchasing the shares of the company, you’re buying all of the assets of the company and all of the liabilities. In practice, it’s almost impossible to know the liabilities of the company. When you purchase the assets of a business alone, you still have enough to continue the operation of the business. It’s a bit like saying I want to buy a deck of cards, but I only want hearts and spades because they’re an asset. You can keep the diamonds and clubs because they’re a liability. Oh and you can keep the joker as well because I don’t know what that is. I can operate the business just fine with just the hearts and spades. A share sale looks so simple on paper. An asset purchase may seem more complex at first. You need to dissect the business and list the parts of the business you want to buy. You will need an asset purchase agreement. If the business you’re buying is going to have some intellectual property, then you may want to govern that with an intellectual property agreement. If the seller is going to provide services to the buyer for a period of time, then you’ll need a transitional services agreement. The added cost and complexity of dissecting the business now is worth the benefit of knowing that the business cannot contain any landmines in the future.

On today’s show, we’re going to dissect a word where you probably think you understand the meaning. That word is used often. It makes headlines. In fact it’s a highly abused word, especially in the news. That word is “Economy”. You’ve probably attended a talk on the state of the economy. I’m going to emphasize, “the economy” as if there is only one economy. Some economic indicators you’ve heard are things like gross domestic product, unemployment, workforce participation, consumer price index. All of these metrics are used to describe the state of the economy. Let’s run a little retrospective on the past 12 months. The past year has been among the most tumultuous in economic terms in recent memory. In the United States the economy experienced a loss of 22.36M jobs over an 8 week period from February to April. That amounts to 14.7% of the workforce lost their jobs. But these job losses were not uniform at all. The worst states were Michigan, Vermont, Nevada and Hawaii all having job losses exceeding 20% in a matter of weeks. Michigan was the worst at 23.8% of all jobs lost. At the other end of the spectrum Oklahoma, Wyoming, Nebraska and the District of Columbia all had job losses less than 10%. Oklahoma lost the feast jobs at 8.5% of jobs lost from February to the trough in April. Let’s look at the recovery from April to December. How many of the lost jobs were recovered? Well the results vary widely. Some states like New Mexico only recovered 31% of the lost jobs during the pandemic. Texas recovered 64.4% of the lost jobs and Idaho and Utah recovered 102 and 103.6% of the lost jobs respectively. In Utah and Idaho, the economic downturn has been erase like it never happened. So for the year ending December 31, 2020 Hawaii is down 13.8% for the year, and Utah and Idaho are up 0.6% for the year. There is no one single economy. For those who have lost their jobs, and exhausted their unemployment benefits, they’ve burned through their savings, maxed out their credit cards and probably dipped into their retirement savings in order to make ends meet. For them, the current conditions are among the hardest they’ve experienced in their life. For the vast majority, those who have jobs, who kept their jobs, they kept their incom e. They didn’t have much to spend it on. The personal savings rate across the US went from an average of 7% before the pandemic to a peak of 35% during the middle of the pandemic before settling out to an average savings rate of 18% for the year. Not surprisingly, with all that extra cash in the system, few places to spend it, credit card debt reduced by about 12% across the nation. You see there is not one single economy. There are a number of macro economic forces that are at play. They will disrupt the current situation. Imagine taking a chess board, throwing all the pieces up in the air and seeing where they land. Some of the chess pieces will land in a vulnerable spot. Others will land in a winning spot. That’s called luck. If we look to the random nature of that jump ball situation, we will be either winners or losers. But all of that neglects that we have agency, we have the power to change our own personal direction to adapt to the market conditions as they are on the ground. That agency means we can make conscious decisions to play defence and wait it out, or play offence and capitalize on the market conditions. So what does that mean? Business is nothing more than a sport of solving problems that people are willing to spend money to solve. If you can be seen in the market as a credible solution to a given problem, you can do good business. It’s not the market’s job to come to you. It’s your job to solve a business problem that people are willing to pay money to have solved. When you look at the world through that lens, the economy is irrelevant. In fact, there is no economy.

On today’s show we’re talking about the link between online and offline and the world of real estate in particular. When I look to see where real estate is going, I look to online innovators. That seems counter-intuitive. After all, we live in an offline world. When we think of the online world, your first thoughts might go to Facebook, or Instagram, or TikTok or ClubHouse. How could those technologies possibly disrupt the world of real estate? It makes no sense. In my view, the disruption to the physical world is going to come from the online world. The catalyst for disruption in real estate won’t come from a new building technology per se. Although there are a number of innovations in technology that are changing the way buildings are designed and constructed. I look to those companies that are upending business using technology. We’re talking about how Travis Kalanick, the founder of Uber, and most recently of Ghost Kitchen startup called Cloud Kitchens. This was merely an idea a year ago. Today, some top chefs in NYC have abandoned their expensive real estate and are serving the take-out market out of commercial kitchens located in less expensive industrial space, rather than the prime location kitchen with the fancy ground floor restaurant dining room attached. I attend a daily meeting with Glenn Sanford, CEO of EXP Realty. You might be wondering what I’m doing hanging out with the CEO of a real estate brokerage. I’m not a real estate agent and don’t want to be. Apart from the word of real estate, there’s no real connection. What sets Glenn apart from others in the space is that he speaks like a software designer. He uses language, terms and metaphors that came out of the world of software development. It’s not an act. He simply exudes it. As we’ve talked about recently, When I look at the systems he has used to build his business, there’s no doubt in my mind that he is thinking scalability, the kind of scalability that can only be matched in an online world. His company has experienced the kind of growth that only a software company can achieve. It would have been near impossible in a bricks and mortar business. It used to be the case that an impressive office with a sprawling lobby and layers of assistants made an impressive first impression for a prospective client, or an aspiring employment candidate. Today, that’s a distant memory. I’ve been using zoom for meetings for several years now. But my use of zoom has expanded dramatically. Even in the past week, I have spent no less than 6 hours a day in zoom meetings on some days. In December of 2019, zoom had about 10 million daily active participants. By March this had grown to 200 million and by April, over 300 million. How did zoom scale their enterprise by a factor of 30 in the span of months? The ease of use of zoom and the excellent performance made this possible. It turns out that Zoom uses Amazon’s web services data center. They’re one of the largest suppliers of third party data services. Amazon’s server farm was easily able to scale the service offering to meet the needs of zoom’s growth. None of these shifts individually represent a major change. But cumulatively, the compound effect of all these changes on the design of real estate is significant. I don’t need to dedicate as much wall space for book cases anymore. How many people used to have a video studio in their homes 20 years ago? Hardly any. Today, I know of dozens. If I was designing a home for this coming decade, I would be designing it differently compared with only a few years ago. Back in the day, homes and apartments used to have a built -in cabinet for the delivery of fresh milk. Today, nobody would even think of that. But a secure e-commerce locker makes a lot of sense. We know that technology is changing rapidly. We have no idea what building technologies will look like in 30 years from now.